Grassley: Middle-Class Saving and Investments Act

Prepared Floor Remarks by U.S. Chuck Grassley of Iowa

Middle-Class Saving and Investments Act

Tuesday, June 14, 2022

 

On Friday, we learned that inflation surged to 8.6 percent, a new 40-year high. Inflation is the number one concern I hear from Iowans as I make my 99 county tour through the state. I hear how rising prices, particularly for food and energy, are cutting into budgets making it difficult to make ends meet.

 

Moreover, I hear from Iowans who are concerned that inflation is eating into their savings. This is particularly true of seniors who are living on a fixed budget and are dependent on their savings and investment income to keep their heads above water.

 

Yet, President Biden and congressional Democrats continue to ignore the damage done by their reckless tax and spend agenda. Sadly, their solution for inflation is just more of the same old Democrat tax and spend agenda.

 

Several Democrats have argued for hiking taxes to combat inflation. However, their proposed tax hikes on job creators would suppress business investment lowering productivity. This would be counterproductive at a time when consumer demand far outpaces supply. We need more production – not less – to combat unchecked inflation.   

 

Moreover, many of the proposed Democrat tax hikes would be passed on to the middle-class in the form of lower wages and higher prices. These tax hikes would further squeeze a middle-class that’s already enduring the worst of inflation.

 

Raising taxes on job creators isn’t the only misguided Democrat proposal. While many consumer products are in short supply, ill-conceived Democrat proposals are not.

 

In addition to reckless tax hikes on businesses broadly, Democrats have proposed providing consumer gas rebates, forgiving student loan debt, imposing windfall profit taxes on oil and gas and implementing price controls. None of these proposals would help tamp down inflation. Instead, they would only make things worse.

 

Instead of providing relief, gas rebates would increase demand-driving prices higher. Forgiving student loans would have a similar effect and would be horribly counterproductive.

 

You don’t have to take Chuck Grassley’s word for it, prominent Democrat economist Larry Summers has said that student debt cancelation would be “regressive, uncertainty creating, untargeted and inappropriate at a time when the economy is overheated.” 

 

Windfall profit taxes and price controls may be the worst proposals of all.

 

Both were tried in the 1970s with disastrous consequences. Anyone who lived through that time can tell you how these policies made things worse by reducing supply. The result was rampant shortages – most notably gas lines around the block.

 

When addressing inflation, Congress must be guided by a principle of first do no harm. Democrat proposals fail this principle miserably.

 

The fact of the matter is that once the inflation fire gets started, it’s hard to put out. The Federal Reserve is best suited for reining in inflation given its control over the money supply. As Milton Friedman said, “inflation is always and everywhere a monetary phenomenon.”

 

This doesn’t mean Congress is helpless when it comes to responding to inflation.

 

The most important thing Congress can do is stop spending like drunken sailors. Even better would be to trim the budget to eliminate unnecessary spending.

 

Congress can also provide targeted inflation relief. However, it must be done in a way that won’t add to our growing debt or further fuel the flames of inflation.

 

One way to do this is by providing targeted inflation relief that incentivizes and rewards taxpayers who save rather than spend.

 

With today’s high inflation, many in the middle-class could see most, or even all, of their savings and investment gains wiped out by inflation. Yet, even though a middle-class saver may be losing money in real terms, they are still taxed on all gains and interest income as if inflation doesn’t exist.

 

This creates a perverse incentive that encourages taxpayers to consume today, rather than save. This can push up demand for goods and services, forcing prices higher and further fueling inflation.

 

To help counter the current bias in favor of consumption, I propose subjecting most middle-class savings and investment income to zero tax.  

 

Now, this isn’t a silver bullet to fight inflation. Ultimately, the Federal Reserve will have to do the heavy lifting. However, unlike counterproductive Democrat policies, my proposal would incentivize and reward saving. As a result, it would get relief to the middle-class without further fueling consumer demand or reducing production and supply.

 

Under my bill, the Middle-Class Savings and Investment Act, taxpayers in the 22 percent individual income tax bracket and lower would pay zero tax on their long-term capital gains and dividend income. Moreover, my proposal would allow individuals to exclude a reasonable amount of interest income from tax.

 

For 2022, the combination of these provisions means an individual with taxable income below $89,075 or a married taxpayer below $178,150 would largely be able to save tax-free.

 

In addition to exempting the middle-class from tax on most of their savings and investment income, my proposal would enhance and expand the Savers Credit. This provides a tax credit to low- to middle-class taxpayers who contribute to a tax favored retirement account. My proposal would increase the maximum credit amount by $500 for married taxpayers and expand eligibility to more taxpayers.

 

Finally, my proposal would address a massive marriage penalty that is gradually catching even more taxpayers by surprise thanks to inflation. Under Obamacare, Democrats imposed a new 3.8 percent tax on the investment income of taxpayers earning over $200,000 single or $250,000 married.

 

Congress never indexed these thresholds for inflation. Thus, given current inflation, it likely won’t be long before millions of middle-class taxpayers find themselves squarely within its grasp. To prevent this, I index the income thresholds for this tax to inflation. Moreover, I eliminate the marriage penalty by raising the threshold for married taxpayers to twice that for single earners.

 

Of course, any relief provided must be fully paid for to ensure we aren’t just adding to unsustainable debt and deficits.

 

This is why my proposal is fully paid for by extending the $10,000 cap on the state and local tax (SALT) deduction beyond its current scheduled expiration at the end of 2025.

 

The SALT deduction is a highly regressive tax subsidy that primarily benefits high-income taxpayers. According to the non-partisan Joint Committee on Taxation, more than half the benefit from lifting the SALT cap would go to those making over $1 million.